TIGTA: Revise Form 1099-R to Improve Taxpayer Compliance

In a report released on February 7, the Treasury Inspector General for Tax Administration (TIGTA) recommended the IRS change its Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., to improve taxpayer compliance with reporting and paying tax on this type of income (TIGTA, Opportunities Exist to Identify More Taxpayers Who Underreport Retirement Income (2012-30-011) (1/30/12)).

TIGTA performed an audit of selected 2007 tax returns to determine if the IRS has effective controls and processes in place to ensure that taxpayers and retirement income payers are computing and reporting the taxable portion of retirement income correctly.

The IRS has estimated that underreported retirement income added $4.2 billion to the tax gap in 2001. For 2008 and 2009, taxpayers filed approximately 21 million returns reporting $293 billion in income from IRAs, and approximately 52 million returns reporting $1 trillion in income from pensions.

In its audit, TIGTA found that taxpayers are receiving contradictory and confusing information on Forms 1099-R that they receive. Some of the confusion stems from Forms 1099-R that report a taxable amount, but also have the box checked indicating that the taxable amount could not be determined. TIGTA says the Form 1009-R instructions require some payers to complete the form this way.

TIGTA also reported that some taxpayers receive Forms 1099-R reporting gross distribution amounts but with the taxable amount left blank. Current IRS guidelines do not require the payer to always include the taxable amount on Form 1099-R when it cannot be determined.

Among the changes TIGTA recommended were:

• Clarify the meaning of “Taxable amount not determined” in box 2b of Form 1099-R to reduce taxpayer confusion (the current Form 1099-R instructions for recipients state, if box 2b is “checked, the payer was unable to determine the taxable amount.”). According to TIGTA, the IRS should clearly communicate that the taxpayer is responsible for determining the taxable amount.
• Include the dates of distributions and transfers on Form 1099-R and Form 5498, IRA Contribution Information, to enable the IRS to identify distributions not rolled over within the 60-day limit.
• Establish procedures to transcribe additional lines from various tax forms (this section of the report is heavily redacted, but the legible part suggests converting the simplified method worksheet that taxpayers complete in determining the taxable and tax-free amount of their pension into a tax form that is required to be filed with the tax return).

The IRS responded to these suggestions by agreeing to clarify the box 2b, taxable amount not determined, instructions. However, the IRS did not agree that including the dates of distributions and transfers would increase compliance. It agreed to study whether requiring taxpayers to file the worksheet and including any other forms in reporting would increase compliance without burdening taxpayers too much.